Why mark-to-market matters - MoneyWeek Investment Tutorials

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[@rodctenis]

I think there are a couple of things to add. First, regarding derivatives, in some cases the price is hard to find, but not all the time. If derivatives are traded in exchanges or are OTC with central clearing systems and/or procedures to provide up-to-date pricing information, the mark to market system works. Then the real problem are basically, OTC derivatives under bilateral agreements.

[@rodctenis]

Another important point when talking about mark to market is the situation of the assets: if assets are held to maturity then, I agree with your approach (let's say bonds, if I don't want to sell them), however, if assets are available for sale or are acquired with the intention to trade them, then the mark-to-market is a better approach because gives a better picture of the real situation of the company. Yes, I can keep them and wait for a recovery, but my real today's bottom line is different.

[@marcinnowogorski]

Great explanation, thanks! However, what I miss here is a liquidity issue. If a bank has derrivatives piled up, he may mark them to market at the actual price receiving great value while if they would throw these assets on the market they would devastate it getting 60 or less percent out of it. Another problem with MTM shows up when stock market crashes and media are shouting how many trillions of dollars were erased. They ignore the fact, that MTM gain or loss is just on a paper, never booked on an account. MTM valuation just does not take into account the possible execution...

[@aalok080986]

Excellent ..all your videos are amazing and you have the ability to explain the most complex topics in the most simplest way..i wish you were my professor at Uni

[@lividpudding8565]

In his last example of bank funded by issuing bonds, when a bond is downgraded, say from investment grade to junk, bond's price plummets but the bank would have to pay the whole principal at maturity. How does that decrease the money the bank would have to pay for its bondholders in case it's marked down?

[@EwanLiveatTAStadium]

ashrit kashyap its called an adjustment for Own Credit Risk. The idea being that if the bank defaulted then it wouldn't have to pay the lot back. Stupid idea really.

[@krishnaKumar-zi6ct]

Superb explanation Tim, loved the part about flip side of MtM valuation! You keep it so engaging as well! Thanks a lot!

[@Matthewgez]

I just have to pause the video and say this is a great great tutorial, thank you and keep them coming!

[@MoneyWeekVideos]

That's exactly my point - since with mark to market you end up with a £200, why bother with two systems at all? M2M makes for extra complexity and profit volatility (in years 1-4), neither of which help investors. So, to cut to the chase, why have a mark to market system? If it didn't exist the video wouldn't be needed! Tim.

[@danchisholm1]

Your videos are so helpful. Would love to see them get syndicated into UK/US school systems.

[@dmtrsppps]

Tim with m2m u have a clearer view of ur risk during the process before booking the profit or loss

[@sharmalondon]

Brilliant, clarity on the short term MTM consequences is awesome..

[@PrasadCPerera]

You are exceptionally better at teaching sir .Thank you so much for this informative video.

[@pulpfiction9725]

Hello Christian Bale thanks for your excellent explanation.

[@MartinChowdhury]

ITS GREAT VIDEO...I listened every VIDEO TUTORIALS of TIM..amazing friendly lectures...

[@nirvau69]

I learned a lot from this guy. Wish he was my economics teacher way back in school!

[@dishtibholah7555]

It's a great video. It's was clear and you tried to explain it in a very simple way. It was very helpful :)

[@engkeelau7736]

Simple and clear explanation! Thank you, Tim! Excellent!

[@chesthoIe]

So can you switch if you use honest accounting vs. mark to market? Like, can a company say, "Those numbers don't look good, use mark to market accounting this time, see if it is better." Do companies still use mark to model? That is where you say buy a contract and make a model of how much it will make and book that as your profit from the first day, right? It seems like you are building your company on a huge house of cards if you use any of this stuff.

[@annasz3292]

Does unrealised gain/loss from MtM movements impact the amount of corporation tax since it flows through P&L?

[@codechrist]

Thanks Tim I really enjoy your videos. You are really Intelligent.

[@MoneyWeekVideos]

Yeah, mark to market/model suited the banks in the good times and not in the bad. My view? It should never really have been applied so widely in the first place. It's an example of the accountants trying to make reporting "realistic" and forgetting that it also needs to be relevant and useful to investors. I am not sure M2M achieves these goals. Tim.

[@BeautifulLifee]

Good one

[@ExcelTutorials1]

I appreciate the knowledge!

[@HonestOpinion]

Base on ur examples on board I have few question. Do you sell the share before the 2nd year or u keep it till u wanted to sell it? On every year it went down, do u report it as capital loss or u only report capital loss if u sold it below the purchased price?

[@tommasosalvadori3102]

Do you actually have to pay more taxes due to mark to market fluctuations? Thanks for your videos

[@ronnellacampuenga3674]

How about if the market takes long time to recover or not recover at all in our lifetime? Like what is happening with the US property market.If the banks, fannie mae, freddie macs didn't mark to market the price of property they can still sell their CDOs at their own valuation and later the buyers of these CDOs will find their investment less worthy once the credit agencies downgrade them as a result of a down property market....this may have the same result (2007 real property crisis)

[@shakaama]

I know you're just explaining this, but a prime example of why people are against mark to market is that you have situations like the cds and mbs where the underlying value is little to none, yet the banks wanted to sell them to the government for face value and not market value. So instead of $200 million, they would have received $800k for an entire mbs. If a company today uses mark to market, their company is going to be shown as bankrupt, because their assets do not cover their liabilities.

[@istoleyourpc6721]

this was the most clearly explained video thank you

[@phaedrussmith1949]

Enron always did very well with MTM.

[@QQQQQman]

he is the best.

[@MoneyWeekVideos]

I agree with that last sentence for sure! We need to clear out all the bad debt debris from boom years before growth can get going properly. Otherwise we'll be in a zombie Japan-like state for years.

[@hungryghost5589]

Very interesting

[@NicosMind]

Fingers crossed for turning out like Japan. Have you ever heard of Rogoff and Reinheart? They wrote a book called This Time its Different and have done a lot of important research into debt and bankruptcies of nations including looking at private sector debt. Their latest research apparently shows that countries that have debt greater than 90% for 5 years lose something like 25% GDP on average. Aint read it yet but heard it here watch?v=-g_ZO_IlcFs at 5:20

[@NicosMind]

Keep in mind i said mark to model incentivised the banks to lie and not market. Also i want to make clear that im not arguing with anything that Tim is saying here. Tim knows a lot more about the system and how it works than i do. However i have been following the financial news for the past 5 years(Keiser Report is great), and have read a few books about the crisis. House prices rose to unsustainable records. A normal boom is 20% but we had a 200% boom. So in order to get bailouts they lied.

[@bobmindyou]

If I am an individual that day trades full time, can I qualify for the mark to market method of tax filing? I make about 6-8 day trades per day

[@sarahchen4385]

Brilliant and fun. The best!

[@NicosMind]

(cont) ignored that. Theyre pretending that houses are gonna keep trending higher. That the boom was natural and that houses should be much higher than they are. Youve got some great points. But having those who own the asset doing mark to model means theyre always going to be incentivised to lie. Its why banks arent lending to each other. Cause they know each others models are full of it. Definitely bad points to both.

[@christellecoetzee7356]

Is the reflection of unrealised gains/losses in the IRR calculation, a form of Mark to Market methodology?

[@basel3858]

Not really; as it is not included in net earnings, it does not distort the earnings per share the same way mark to market accounting can.

[@crawfordviolin]

Love your vids man.

[@michaelcrabtree1647]

i wasn't aware that putting numbers in parentheses indicates a loss or a negative value. Could it be that you've discovered a new way to do basic math?

[@icmull]

ya crappier... ahahahhaha great video.

[@NicosMind]

Yeah its a tricky thing. When to use one over the other. Houses were clearly over priced historically and unaffordable looking at the house/wage ratio. Their models were/are completly faulty and cause of that theyve recieved trillions which they would never have recieved had their models been more realistic. Amoungst other things(hiding losses off the books using special purpose vehicles etc). My opinion is they should have gone bust like in Iceland and we'd have seen a true recovery years ago

[@nodeal4791]

Clear information.

[@adrianpierre5492]

Nts-from 4 min till, speed up cal of mtm

[@PonziNation]

your vids are awesome

[@dmtrsppps]

Because M2M gives a clearer picture of the state of a business when it has millions of trading losses but havent BOOKED them yet...U have a clearer view of ur risk investing in that firm and u have a clearer picture of their default risk...

[@NicosMind]

I think America wanted to ban mark to market cause it showed the banks were truely bankrupt and that would have stopped them getting bailouts. And thats the problems with those banks and the banks in Europe cause they use mark to model. Cause they would never have gotten any bailouts cause theyre technically bankrupt. And using mark to model can be very stupid cause its mark to fantasy. In reality the average price of a house to a wage has been historically linked. Yet banks have (continued)

[@natemoore4243]

Good video, but your math in the very beginning is wrong. Might be confusing for some

[@basel3858]

Hi, could you carify what part of his math is in your opinion wrong?

[@cameronlukewilson281]

Fantastic. :)

[@adamFromDurban]

brilliant videos . but lol why do you start whispering halfway through all of them😁

[@remlatzargonix1329]

Muhammad Adam ......because it's a secret?😀

[@johnford1043]

If a firm is using assets for net capital requirement they should be MTM, always. If the asset is hard to value, take a bigger haircut. Haircut could be 90%, I have heard so much crying, many firms for years ran businesses using MTM. It is not that hard.

[@kevinimp8217]

there cents not pants

[@michaelvanbebbermusic]

Get to the point!